Thought note on Emerging Opportunities in the Indian Fertilizer Industry. Published in Chemical Weekly magazine and IndiaChem 08 International Conference and Exhibition

1. Special Report
Emerging Opportunities in the Indian Fertiliser
Market
T
he growing demand for fertili- FY 2008. The demand for food grains
PRATIK KADAKIA,
sers makes the Indian market is expected to grow rapidly with in-
JEFFRY JACOB &
highly attractive for domestic creasing consumption in fast develop-
ANSHUL SAXENA
and foreign manufacturers. Recent ing economies like India and China.
Tata Strategic Management Group
policy changes by the government are This could result in global inventories
Nirmal, 18th Floor,
a welcome step and will open up op- witnessing a record low in the near
Nariman Point, Mumbai 400 021
portunities for local companies to future. Rising consumption of food
Tel: +91-22-6637 6789;
strengthen their domestic presence and grains necessitates increased produc-
Fax: 91-22-6637 6600
meet global aspirations. tivity, thereby leading to increased
Email: pratik.kadakia@tsmg.com
demand for fertilisers.
The three main nutrients for plant This necessitates increased productiv-
growth — N (Nitrogen), P (Phosphate) Increased biofuels production ity from the available land, in turn lead-
and K (potash) — are primarily con- Biofuels production has been in- ing to increased fertiliser usage.
sumed through urea, DAP (di-ammo- creasing over the last 4-5 years, pri-
nium phosphate) and MOP (muriate of marily led by US and Mexico. Biofuels Thus, global fertiliser demand is
potash) fertilisers, respectively. The will reduce global dependence on expected to grow at about 2.8% per
global fertiliser demand has grown by crude and will also reduce carbon foot- annum during FY2008 to FY2013,
about 10% over the past two years, print of vehicles. Increasing demand which is higher than the five-year av-
on the back of rising food grain con- for biofuels would require higher pro- erage growth of the past decade. Of
sumption and commodity prices. This duction of sugarcane, corn, maize and the three main nutrients, nitrogen de-
trend is likely to continue in the fu- other feedstock crops. Biofuels pro- mand is expected to rise faster (2.9%
ture, the main drivers being: duction also influences the prices of per annum) than phosphate (2.6% per
global cereal, oilseed and sugar, lead- annum) or potash (2.4% per annum).
Increasing food grains consumption ing to a larger indirect impact on
World grain production has always fertiliser demand. Emerging trends
had a tough time keeping pace with Urea
the increasing consumption levels. Reduction of available land Natural gas comprises 65% of the
Despite the year 2007 witnessing a Rising urbanisation has resulted in cost of production of urea. Natural gas
record global cereal production of 2.1- reduction of global available arable land or naphtha is converted to ammonia,
bt (billion tons), a small demand-sup- from 0.27 hectare per capita in 1998 to which is a major feedstock for urea
ply deficit was expected by the end of estimated 0.15 hectare per capita in 2015. production. Sustained availability of
Figure 1: World grain production & consumption Figure 2: Split of world grain consumption
Source: Yara Fertilizer Handbook, PotashCorp Source: Yara Fertilizer Handbook, PotashCorp
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2. Special Report
natural gas at competitive rates is
therefore critical for urea manufactur-
ing. Most new urea capacities are
planned in countries where gas is avail-
able at competitive rates.
Middle East has emerged as the
largest exporter of urea, exporting
about 8-mt and accounting for about
45% of global urea trade in FY 2007.
Global urea capacity is expected to in-
crease from 158-mtpa in 2007 to 201-
mtpa by 2012. Majority of this capac-
ity addition is being planned in gas
rich regions i.e. East Asia (about 21- Figure 3: Average 2007 regional natural gas price (US$/ mmbtu)
mt), West Asia & Africa (about 12-mt). Source: Yara Fertilizer Handbook, PotashCorp, www.crugroup.com, RBC capital markets
Ammonia capacities are similarly be-
ing planned near natural gas reserves. world. Morocco, the second largest Global DAP demand is expected to
Countries like Iran, Egypt, Qatar, Saudi rock reserve base, is planning P2O5/ increase by 3.3% per annum during the
Arabia & Algeria are all set to add 4.4- DAP manufacturing hubs near its rock period 2008-2012. The planned DAP ca-
mt of merchant ammonia capacity by mines. Going forward, almost all new pacity addition would ensure just
2012. DAP manufacturing units are expected enough production to meet the rising
to come up near rock reserves. demand.
Diammonium phosphate
Rock phosphate constitutes about Muriate of potash Global MOP demand is expected to
30% of cost of production of DAP. Capacity additions are planned in increase by 2.4 per cent per annum from
Rock phosphate is first converted into current major producer countries, i.e. 2008-2012. The planned capacity ad-
phosphoric acid, which is a major feed- Canada, China and Russia with some ditions are expected to create a pro-
stock for DAP production. Majority of greenfield expansion in Argentina. duction surplus of 7.1-mt (K2O) pot-
the new capacities for phosphoric acid ash by 2012.
(P2O5) and DAP are planned near rock Global demand-supply scenario
phosphate mines. During the past five Global urea demand is expected to Globally, the fertiliser demand-sup-
years, the world fertiliser industry has increase by 4.7% per annum during the ply scenario appears comfortable with
witnessed a sharp decline in exports period 2008-2012. Demand-supply gap supply meeting the demand. The In-
of rock phosphate from China, the larg- is expected to remain tight, with sup- dian market however presents a
est rock phosphate reserve base in the ply just managing to meet demand. slightly different picture.
Figure 4: Global demand-supply situation for important fertilisers
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3. Special Report
Highlights of Indian fertiliser crease further, has virtually turned In- price of US$250/ ton and a ceiling of
industry dia into a seller’s market for global US$425/ ton. The Government has also
India is one of the major regions manufacturers. deregulated debottlenecking and
contributing to rising fertiliser de- brownfield expansions. Companies no
mand. The fertiliser demand in India is Regulations and policy changes longer require prior approvals for ex-
expected to increase at about 4.3% per Because of its direct linkage to na- pansion of their existing sites and can
annum from FY 08 to FY 13, higher than tional food security, traditionally the sell the additional urea at IPP linked
the global growth rate of 2.8% per an- fertiliser sector has been highly regu- prices. Indian companies are also en-
num during the same period. lated. The production, distribution and couraged to invest in gas rich coun-
pricing of fertilisers have been con- tries with the Government indicating
In FY 08, India imported 6.8-mt of trolled by the Government of India. The its willingness to enter into firm offtake
urea, making it one of the largest urea burgeoning subsidy bill and huge de- agreements.
importers in the world. Urea demand mand-supply mismatches are a wake-
is forecast to increase by about 3% up call. The current situation necessi- Future outlook
per annum to reach 29-mt by 2011, tates deregulation in this sector. Due By 2015, India is expected to face a
which we believe is a very conserva- to sensitivities involved, complete demand-supply deficit of 8-9-mt of
tive estimate. The planned capacity deregulation of fertiliser sector is still urea. The recent initiatives may result
additions are not sufficient to meet not a viable option. How much the in relieving its heavy dependence on
even this forecast. The main reason Government can deregulate, therefore imports in the near future. However,
for insufficient capacity addition is the remains a critical issue. these are only the first steps towards
unavailability of natural gas at com- bridging the current 6-mt deficit that
petitive rates. In the recent past, the Government Indian urea industry faces. Without
has embarked on deregulating this these initiatives, the situation could
India currently imports about 2-mt sector, particularly in the areas of in- have only worsened further. It is a
of DAP per annum. Indian DAP de- vestment and distribution of phos- commendable initiative by the Govern-
mand is expected to increase by about phatic & potash fertilisers. However, ment to deregulate expansion and pro-
5% per annum till 2012. But the planned in case of urea, control over pricing moting revamp of capacities. Urea ca-
capacity additions are not expected to and investment continues to hinder pacities totalling of 3-mtpa are ex-
match the projected demand, increas- growth. The Government has realised pected as a result of the new policy
ing India’s dependence on imports. that further deregulation is necessary changes.
Also, unavailability of rock phosphate in order to facilitate capacity additions.
is a major roadblock for capacity addi- Regulations in greenfield expan-
tion. The recent policy announcement sion and cash flow challenges due to
by the Government has linked urea delay in subsidy payments continue
The current dependence on im- purchases from domestic companies to hinder new investments in urea. For
ports of fertilisers, which will only in- to IPP (Import parity price) with a floor a long term solution to the demand-
supply deficit,
the Govern-
ment needs to
further deregu-
late this sector
to facilitate
greenfield ex-
pansions and
enable entry of
new compa-
nies.
Strong po-
litical will would
be required to
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4. Special Report
push through the initiatives necessary can go ahead with their plans of greenfield units in India, expecting
to promote investment and production debottlenecking and brownfield expan- favourable policy changes.
of urea. Since gas finds usage in other sion without waiting for approvals.
industries like power, infrastructure for Sale of urea at IPP linked price will pro- In phosphatic fertilisers, India sim-
transportation of gas is already in place mote fresh investments at existing ply does not offer itself as a lucrative
and setting up additional pipelines sites. In a way, the Government has investment destination due to unavail-
should be encouraged. The ease of rewarded all the existing Indian urea ability of rock phosphate reserves.
transportation of natural gas and mer- manufacturers and also encouraged With the increasing trend to set up
chant ammonia would allow urea units them to invest in natural gas rich coun- P2O5/ DAP units near rock mines, new
to come up closer to demand locations, tries overseas. capacities are likely to be setup out-
i.e. in India, rather than in gas-rich re- side India. As in case of urea, domes-
gions. Also, expected production of gas Indian companies now have the tic DAP manufacturers are also ex-
from KG basin would increase availabil- option to set up capacities overseas pected to invest/strike alliances
ity of gas in India. to serve the Indian market. This may abroad.
lead to several overseas acquisitions
In case of DAP & potash, the Gov- by Indian companies. The biggest The Indian companies are all set to
ernment has already deregulated in- challenge in setting up operations strengthen their local business and
vestment and capacity expansions. overseas is the political risk associ- realise their global dreams through al-
Companies no longer require prior ap- ated with foreign countries. liances/ foreign investments. Indian
proval for their expansion plans. fertiliser companies have waited quite
The Indian companies would now a while to realise their global ambitions,
What does this mean for the Indian have to choose between the political but now with favourable Government
fertiliser industry? risks of setting up urea capacities in policies, they can take firm steps to-
Indian fertiliser manufacturers now an unfamiliar country or setup wards fulfilling those ambitions.
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